Pennsylvania public utility commission

F. PROPOSED RESOLUTIONS OF THE PLR ISSUES

1. Introduction
As originally filed, the PLR Petition requested an accounting and regulatory deferral mechanism. The Supplement to the PLR Petition GPU Energy filed in accordance with the Commission’s February 1, 2001 interim order contained additional support for the deferral, as well as support for a rate cap exception; or, some combination of both remedies.
As discussed below, I do not recommend GPU Energy’s proposed DTM, either alone or coupled with an immediate increase. I recommend that Met-Ed be permitted to file tariff supplements adjusting its existing PLR generation rates to collect additional annual revenues of $162,500,000 and that Penelec be permitted to file tariff supplements adjusting its existing PLR generation rates to collect additional annual revenues of $154,200,000.
2. PLR Deferral Mechanism (DTM)
Recognizing the difficulty of setting new rate cap levels with any degree of certainty in today’s highly volatile energy and capacity market, and to initially not raise rates to customers, Met-Ed and Penelec originally proposed adoption of a PLR Deferred Tracking Mechanism (DTM), similar to the Energy Cost Rate mechanism used in Pennsylvania for many years to track the actual energy and capacity costs of electric utilities. The DTM is described in detail in Mr. D’Angelo’s testimony. ME/PN St. No. 3-PLR at 15-19.
Under the DTM, the Commission would permit Met-Ed and Penelec, beginning January 1, 2001, to defer the net difference between their retail charges for generation service and their market cost of supply. This net cumulative amount would be deferred together with carrying costs for ultimate recovery as directed by the Commission. Id. at 16; ME/PN Exh. RAD-9. Met-Ed and Penelec have proposed that the Commission review the DTM and address the timing of the recovery of the net balance during the proceeding already scheduled to take place in 2004 under the Restructuring Settlement. Id.

Periodic review and auditing of the DTM would follow the typical procedures employed in previous years to monitor the Energy Cost Rate. Such ongoing Commission review would enable subsequent recovery issues to address only the timing of cost recovery, since the costs themselves would have been fully audited. Applicants’ M. B. at 99-100.

The OCA points out that GPU Energy has not demonstrated that it is entitled to an exception to the rate cap under the Act and that the DTM would allow this exception and collect the associated costs at a later time when ratepayers have no rate cap protection. OCA M.B. at 110.
MEIUG/PICA asserts that the DTM should not be granted because excess PLR service costs are not valid stranded costs and because implementation of the DTM would impermissibly shift costs from one customer class to another, in violation of the Competition Act. MEIUG/PICA M.B. at 59-62. MEIUG/PICA argues that interim adjustments should be made to the CTC if DTM relief is granted. MEIUG/PICA M.B. at 65-67, 72-73.
The electric generation suppliers agree with MEIUG/PICA. They assert that increasing the generation shopping credits would allow them to re-enter the market, thereby reducing GPU Energy’s PLR obligations and cost exposure. MAPSA M.B. at 13, 26-27; Dominion Retail M.B. at 2, 13, 21-22; New Power M.B. at 3, 10-14; Enron M.B. at 6.
The proposed DTM is a tempting alternative because it would shield customers from the impact of an immediate, large rate increase and there would be hope that if electricity generation market prices moderate, the net balance to be recovered through the DTM would be reduced. Nevertheless, I do not recommend the proposed DTM as a way to provide PLR relief to GPU Energy. The DTM would keep prices artificially low and not allow for the competition which the Competition Act intends. At the end of the DTM period, the customers, which had been paying rates which were too low, would end up paying the DTM deferrals with interest. Rather than delaying the impact of a rate increase and preventing competition among electric generation suppliers, I believe that the better course of action is to raise rates now. This will provide GPU Energy with its requested PLR relief and also will allow more electric generation suppliers to enter, or re-enter, the market.
3. Rate Increase – With And Without Additional Deferral
I do not agree with GPU Energy’s request for an immediate rate increase coupled with a DTM mechanism because, for the reasons given above, I do not approve of a DTM.
The incremental revenue requirements needed to address the forecasted PLR requirements for Met-Ed and Penelec were developed in two steps. First step increases in generation revenue requirements of $126,968,000 for Met-Ed and $141,395,000 for Penelec would be required to meet PLR obligations in the short term and before the loss of existing generation commitments early in 2002. Met-Ed/Penelec St. No. 3–PLR at 13-14; ME/PN Exhs. RAD-2, RAD-4. Step two increases to account for the loss of existing generation commitments would amount to an additional $35,461,000 for Met-Ed and $12,840,000 for Penelec. Id.
The OTS recommends a reduced level of rate relief, namely, an additional $78,155,000 for Met-Ed and $121,862,000 for Penelec. OTS St. No. 2-PLR at 8. These revenue increase levels are based on the rate of return recommendation of OTS witness Deardorff, and in the view of OTS witness Llewellyn Jones would be considered the same as a rate increase under Code Section 1308, 66 Pa. C.S. 1308. Id. at 9. These recommended rate increases for Met-Ed and Penelec would be in lieu of the companies’ proposed DTM mechanism, or any other annual adjustment.
As discussed above, I have accepted the rate of return recommendation of GPU Energy witness Dr. Morin. Accordingly, I recommend that Met-Ed be permitted to file tariff supplements adjusting its existing PLR generation rates to collect additional annual revenues of $162,500,000 and that Penelec be permitted to file tariff supplements adjusting its existing PLR generation rates to collect additional annual revenues of $154,200,000.
4. Rate Adjustment Without Increase
The OCA points out that GPU Energy’s presentation focuses exclusively on its generation revenues received through its generation shopping credit without regard to the level of its transmission and distribution rates and without regard to the impact of the higher market prices on its NUG stranded cost which adjusts to these higher market prices. If T&D revenues are higher than T&D costs, and if the NUG CTC is recovering more stranded cost than what will actually result based on higher market prices, then a readjustment of the rate elements would be appropriate. This readjustment of the rate elements would increase the generation shopping credit while correspondingly reducing the CTC rate and the T&D rate. OCA M.B. at 111.
Given the short time frame for conducting this case, the OCA has been unable to calculate specific adjustments to each of the rate elements. The OCA has determined that Met-Ed is overearning on its T&D rates by $26.9 million and Penelec is overearning on its T&D rates by $8.5 million. OCA St. 2-PLR at 7. In addition, as GPU Energy's testimony indicates, the difference in its NUG stranded cost for the past several years will reduce in some measure the NUG stranded cost that is to be recovered. Rather than wait until 2004 to make this adjustment, when the adjustment is contemplated by the settlement, the adjustment should be made now so as to more accurately reflect market price in both the generation rate and the NUG stranded cost recovery. The Companies should be required to submit a compliance filing that provides for a readjustment of rates to account for these two factors. OCA M.B. at 112.
I do not agree with the OCA. Changing the T&D rates now without specific adjustments to each of the rate elements would cause rate uncertainty. It is better to wait for 2004 to make this adjustment, as provided for in the settlement. I discuss the OCA’s NUG proposal in greater detail in Section V.I. below.